By Elizabeth O'Brien
I have a confession to make: I don't rebalance my portfolio regularly. It's hard to sell your winners when the stock market keeps going up. And I'm not that worried about a crash since I'm not on the cusp of retirement.
Rebalancing makes a lot of sense, though, and it's especially important today. The S&P 500 index has been rising for years, largely fueled by excitement about artificial intelligence. Your portfolio may now be far from balanced, with the bond portion shrinking relative to stocks.
Moreover, you may be inadvertently loaded with technology and communications stocks due to their high concentration in the S&P 500 -- accounting for more than 40% of the index. Any slowdown in AI threatens your whole portfolio.
"Concentration increases volatility, and that can be problematic for investors who are drawing income, including retirees," says Angelo Kourkafas, senior global investment strategist at Edward Jones.
Fortunately, there's no need to predict which market forces will prevail. That's because rebalancing isn't about timing the market: It's about mitigating risk, including AI-related exposure.
Goldman Sachs forecasts that AI investment will drive nearly half of S&P 500 earnings growth this year. The stock market's valuation assumes this influx will continue, but that's not a given.
How should you handle it? At a top level, make sure you still have the stock/bond split you want. If you haven't touched your portfolio in a while, you may have 65% stocks and 35% bonds when you're targeting a 60/40 portfolio.
Bond yields have risen on inflation fears, with the 10-year Treasury note hovering near 4.5%. That's an attractive entry point for investors selling appreciated stock and adding to their bond portfolios. Since selling can trigger capital-gains taxes, it's best, if possible, to concentrate your rebalancing in tax-deferred accounts to minimize tax consequences.
Once your mix is on track, make sure your equity portfolio is truly diversified, including stocks or funds that aren't so heavily dependent on AI.
Given the S&P 5oo's concentration in tech, it's prudent to hold no more than half of your stock portfolio in funds tracking the index. Or consider putting half in growth and half in value stocks, a mix recommended by Morningstar. To achieve that, sell some growth stocks and plow the proceeds into value. The Vanguard Value exchange-traded fund covers the space at low cost.
Another option is to invest in low-volatility stocks. The category encompasses the quintile of stocks with the lowest variation in price moves, emphasizing value sectors like healthcare and financials. Investors in "low vol" essentially trade potential for higher returns for more stability.
The strategy falls short in bull markets, which is the case now. Still, Goldman Sachs recently highlighted an "insensitive portfolio" of stocks with low sensitivity to AI, including names like Darling Ingredients and Kenvue. Other stocks to consider include Johnson & Johnson, Coca-Cola, and American Electric Power, according to J.P. Morgan. The Invesco S&P 500 Low Volatility ETF would also work; it's up 4.7% year to date, one of the better showings in the space.
Non-U.S. equities are also a good diversifier, and they're still relatively cheap. Many advisors recommend allocating a quarter of your equity portfolio outside the U.S. An easy way to access global markets is an ETF like iShares MSCI ACWI ex-US.
Whatever you do, think about rebalancing in terms of your life stage and what you'd do if the market went down 20%. A retiree who depends on portfolio withdrawals to pay the bills might be hard hit. If you're investing for your grandchild's inheritance, you can ride it out.
"It's not about generating more return," says Brad Glover, senior wealth advisor at HB Wealth in Tampa, Fla. "It's about maintaining proper risk for your situation."
Granted, rebalancing is one of those periodic chores that's easy to neglect, like dusting your refrigerator coils. I haven't done that, either. Time for some spring cleaning.
Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 28, 2026 04:00 ET (08:00 GMT)
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